Fitch Maintains Nostrum Mortgages No. 2 on Rating Watch Evolving
The portfolio comprises Portuguese mortgage loans originated and serviced by Caixa Geral de Depositos (CGD, BB-/Stable/B).
KEY RATING DRIVERS
Payment Interruption Risk
Fitch placed Nostrum Mortgages No.2's class A notes on RWE on 3 November 2014, as a result of exposure to payment interruption risk. In its analysis, Fitch assessed the liquidity available in the transaction to fully cover senior fees, net swap payments and note interest in the event of servicer default. The agency found that the available liquidity is insufficient to provide payments to the notes for two interest payment periods should CGD default.
The maintenance of the RWE reflects Fitch's view on the progress regarding the implementation of a liquidity facility to address the payment interruption risk.
Failure to implement appropriate remedial actions will result in the class A notes being capped at three notches above CGD's rating.
Worst Case Scenario
Fitch requested loan-by-loan level default and recovery information for CGD's mortgage book which the lender was unable to provide. As a result, in its analysis Fitch applied the worst case scenario assumptions based on experience of other Portuguese lenders. This involved increasing the quick sale adjustment to 50% from 40% and extending the expected recovery timing to six years from four years. These recoveries were applied to both expected defaults and outstanding defaults that have been provisioned for.
Fitch understands that the servicer has historically repurchased loans out of the portfolio. As there is no binding commitment for CGD to continue with this practice, in its analysis Fitch gave no credit to the historical performance and applied its standard weighted average foreclosure frequency assumptions.
Stable Performance of Underlying Assets
Over the past 12 months, loans in arrears by three months or more (excluding defaults) remained relatively stable at 0.87% of the current portfolio balance and below Fitch's Portuguese index for three months plus arrears (1%). The pace of new defaults shows further signs of stabilisation, with cumulative defaults at 3.0% of the original portfolio balance. As a result, the reserve fund reached its target level in July 2015.
At transaction close, Fitch applied an underwriting adjustment to account for the origination and servicing practices of the lender. This default probability (DP) adjustment was also used in this analysis. The credit enhancement available to the class A notes was sufficient to withstand the additional DP stress.
Deterioration in asset performance may result from economic factors. A corresponding increase in new defaults and associated pressure on excess spread and reserve funds, beyond Fitch's assumptions, could result in negative rating action.
The rating is also sensitive to changes in Portugal's Country Ceiling (A+) and consequently changes to the highest achievable rating of Portuguese structured finance notes.
Fitch will monitor the progress of potential remedial actions and the performance of the transaction and will take rating actions accordingly in the next three months.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Prior to transaction's closing, Fitch conducted a review of a small targeted sample of CGD's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by European Data Warehouse as at 30 August 2015
- Transaction reporting provided by Deutsche Bank as at 20 August 2015.